Hot Fun in D.C., Part 1: Obama's Education Plan

Sometimes it's fun -- and instructive -- to watch how stocks react to developments or pronouncements that are driven by policies in Washington. There can even be good rewards in it, if you learn what to worry about and what to discount.

Current cases in point, for instance, could help bolster sentiment in for-profit colleges, private student loan companies, mortgage servicers and mortgage insurers. I'll address the education story with this post and follow up on the home-finance front later.

You'd think that shares of the maligned higher-ed companies Corinthian Colleges (COCO), Strayer Education (STRA), DeVry (DV), ITT Educational Services (ESI), Apollo Group (APOL), Bridgepoint Education (BPI) and Capella Education (CPLA) might be swooning after President Obama's pledge to create a new ratings system to measure educational outcomes at individual schools and to make the cost and availability of future student aid dependent upon graduation and placement rates. Yet those stocks were all up on Thursday, outperforming the S&P 500 -- as did college loan stalwart Sallie Mae (SLM). Why? A heck of a lot of tough medicine has already been absorbed.

Indeed, Thursday's positive move in the for-profit higher-ed space -- even amid what a short while ago might have been perceived as Obama saber-rattling -- was less a signal of market frothiness than of two realities.

First, these schools have already girded for "gainful employment" rules that were aimed specifically (and only) at them during Obama's first term and then subsequently blocked in the courts. Even as the U.S. Department of Education begins yet another round of negotiated rulemaking sessions led by hand-picked committees that seem to be stacked against their interests, the for-profits, for the most part, seem prepared, and their stakeholders are already adjusting to a new normal.

According to a recent Education Insider Poll conducted by Whiteboard Advisors, 54% of respondents view the pool of gainful-employment negotiators as "unfair to for-profit colleges," almost six in 10 expect the rulemaking to result in a regulation that is "about the same" (48%) or "more favorable" (10%) than the regulation that was struck down, while only 14% predict "less favorable."

As I recently wrote, that doesn't bespeak a breakout from the price discounts that, for many, have yielded little better than flat enrollments. But it does mean that additional threats from the Obama administration might be limited in their effect.

Secondly, many observers seriously doubt that the administration will ultimately succeed in making the not-for-profit colleges and universities adhere to gainful-employment rules or pressures. And this means that, even amid gnashing of teeth over student debt levels, private lenders, led by Sallie Mae and Nelnet (NNI), will be largely insulated and made even more so, thanks to the increasingly private-loan character of their books.

If anything, the notion that Obama might put the not-for-profits "in play" during upcoming reauthorization of the Higher Education Act (HEA) is probably positive for both prop schools and private lenders alike. That's because the Democrats typically rally to the interests of public and private colleges and universities, and by being forced to do so in the political cycle ahead, there might have less firepower to train on the for-profit colleges and lenders.